As you are aware, officials of this Department have been reviewing very thoroughly the implications for Canada of the proposal to create a new United Nations Aid Fund (sometimes called SUNFED). We have come to the general conclusion that Canadian support of a fund of this nature (which we would hope could be shaped into an effective mechanism) would be desirable at this time as part of Canada's general foreign aid activities.

2. Last week at a meeting at which I presided, we met with senior officials of the Department of Finance, the Bank of Canada, and the Department of Trade and Commerce to discuss the role which Canada should play in relation to the forthcoming debates in ECOSOC and in the United Nations concerning the establishment of such a fund. Prior to this meeting we had circulated a paper suggesting that the creation of a United Nations fund must now be given serious consideration by Canada and the other Western countries. (I am attaching a copy of this paper which sets forth very briefly the reasons why the creation of a United Nations fund now looms so important in our thinking.) Officials of Finance also distributed a paper? sketching the kind of fund which they considered would be most appropriate if one were to be established.

3. On the basis of the discussion at this interdepartmental meeting I am confident that the reasoning which is contained in our paper concerning the desirability for creating a United Nations fund was accepted by officials of other departments. More precisely I believe that the Department of Finance is prepared to look quite sympathetically on the idea of a Canadian contribution to some international fund under the United Nations. Indeed I believe officials of that Department are prepared to recognize the desirability of Canada taking an initiative in approaching the other countries traditionally opposed to the creation of a United Nations aid fund (United States, United Kingdom, Australia) and possibly an approach to other developed countries who have given support in the past in the United Nations and elsewhere to various proposals to create an international aid fund (France, The Netherlands, Belgium and one or two others possibly including Germany). The purpose of these approaches would be to explore the possibility of a more positive answer on the part of the developed countries to the increasingly strong case for a United Nations aid fund. Several of the main countries concerned are not in too good a position themselves to take the initiative this year even if they were so inclined (e.g. the United States because of the election and the United Kingdom because of financial difficulties). Canada is probably the best placed to do so.

4. We did not reach a firm understanding with Finance officials about the figure which should be recommended to Ministers for our contribution to the proposed fund or for a total programme covering Canada's contributions both to the Colombo Plan and to this fund. Finance officials took the position that some reduction in our bilateral aid programme (i.e. Colombo Plan) should be made when we begin to contribute to a United Nations fund.⁵⁵ They consider that the present level of our Colombo Plan contribution is exceptionally high on account of special temporary factors (i.e. the atomic reactor and the increased cost of Warsak) and that in later years some reduction would be appropriate. They also feel that we should reserve the right to make shifts subsequently as between Colombo Plan and the international fund within a fixed total contribution in accordance with our assessment of the relative effectiveness of the two programmes as instruments for aiding the under-developed countries.⁵⁶ They did not suggest what total figure they had in mind but implied that it might be only slightly larger than our Present Colombo Plan figure. In that event our Colombo Plan contribution would be reduced by about the amount of any subscription which we might make to an international fund.

5. For our part we do not consider that our objectives in aiding the under-developed countries would be fully met if we agreed at this stage to participate in a multilateral aid programme entirely, or even largely, at the expense of our Colombo Plan operations.⁵⁷ However, I believe that our differences with Finance relate primarily to the definition of the "normal" level of Canada's Colombo Plan contribution after the requirements which gave rise to the recent increase have been met. We acknowledged that the eight million dollar increase this year and the corresponding increase over the following year or so were largely attributed to special temporary requirements (and we included Warsak and the reactor in that category but not the additional million dollars for the "new" countries). We questioned, however, whether in the absence of these particular requirements the figure would have remained at $26.4 million this year. We suggested that there might have been - and might be in the future - very substantial general reasons for a larger contribution. We did not know what the right figure for our "normal" contribution should be. That could only be decided by Ministers. Whatever the correct figure was - and we suggested that it was a good deal higher than $26.4 million - that figure should not be cut in order to release money for the proposed international fund. Our contribution to the latter should be additional to whatever is considered to be our appropriate regular contribution under the Colombo Plan.

6. On the question of the amount which might be contributed to a United Nations fund the differences did not appear to be so pronounced. In our discussions Finance officials spoke of a figure of $7 to $8 million in each of the first two years or $15 million over the two years combined as a Canadian contribution to the initial capital (with an implication that subsequent annual contributions might be somewhat less). This was based on a total fund of approximately $200-250 million annually (of which the United States might be expected to put up about $150 million). Our own feeling was that this total represented a bare minimum for an effective aid fund and we should realize that, for example, a fund of this size would provide limited scope for a fully adequate volume of additional external aid to India during the second five year plan (when she will require about $300 million a year beyond anything now in sight). Although we did not say so at the meeting we would be inclined to think that an initial contribution of $14 or $15 million spread over the first two years, and annual contributions of $10 million thereafter would represent a not unreasonable Canadian share in a fund of this minimum size.

7. In the light of this preliminary discussion at the official level you may think it desirable to attempt to reach an early understanding with Mr. Harris and the Prime Minister concerning the Government's attitude towards the proposed fund. In this connection you will appreciate that we shall have to move quite quickly if we expect to influence the decisions of other governments concerned (and, incidentally, if we hope to prevent the Russians from appearing to be more constructive than ourselves on this subject in forthcoming United Nations meetings).

8. It cannot be said that the desirability or inevitability of such a fund is universally recognized even now. For instance, the United States Administration - whose participation would be almost essential - appears to be still rather cool towards the idea of any United Nations arrangement of this sort, although that view might be altered fairly quickly if other respectable governments were to show concrete interest in the project (or, of course, if Mr. Stevenson or Mr. Bowles were to attempt to make an issue in the election campaign out of the "failure" of the Administration's policies in the under-developed countries).

9. The opportunities for affecting the attitudes of others towards this project will come fairly soon and if we are anxious to promote it some decisions, at least in principle, will be required very shortly if we are to take advantage of those opportunities. The earliest and best occasion for making some impression on the United States Administration will come during the talks which you and the Prime Minister will be having with Mr. Dulles and President Eisenhower in a fortnight's time.⁵⁸ After that we shall be expected to give some intimation of our position at the meeting early in May of the United Nations Special Committee concerned with this subject. There is therefore little time to be lost.

10. I would have thought that it was possible to take a position on this proposal (and on our future Colombo Plan contributions) which would meet most of the objectives which you have in mind while at the same time not offending seriously against Mr. Harris' desire to keep expenditures down (and not requiring him to accept that the figure reached by our Colombo Plan Vote in 1956-57 represents a "normal" contribution). You might wish to discuss with him something along the following lines:

(a) For reasons of the kind set out in the attached paper referred to earlier in this memorandum we should support and actively encourage the establishment of a United Nations fund for economic development on as sound and efficient lines as we can devise and as others can be persuaded to accept.

(b) We should aim at the establishment of such a fund in the fiscal year 1957-58 with the expectation that it would be in full scale operation by the end of that year or during the subsequent year.

(c) The Canadian Government should decide now that from the beginning of 1957-58 and for a period extending at least four years thereafter, subject to the appropriation of funds by Parliament, it will devote a minimum of $40 million a year to the Colombo Plan and this United Nations fund combined.

(d) With respect to the Colombo Plan, our contribution in 1957-58 would be $34.4 million, in 1958-59 would be $31.9 million and in each of the two following years would be $30 million. (The basis for these figures is explained in the Annex? to this memorandum.)

(e) Our contribution to the international fund would therefore be $5.6 million in 1957-58, $8.1 million in 1958-59 and $10 million in each of the two subsequent years. (The first two years mentioned would cover the period when the fund was accumulating its initial resources and our contribution to its initial capital would therefore be $13.7 million.)

(f) The appropriate scale of contribution to these two programmes in subsequent years (if it is decided to continue the Colombo Plan beyond mid-1961) would be determined in the light of the situation existing at that time, with a presumption that the total would continue to be about $40 million per annum.

(g) A decision to contribute at this rate to these particular programmes after 1957-58 would not preclude consideration of special requirements which might arise outside those programmes and which it might be politically important for Canada to assist (for example, expenditures related to the Jordan Valley Scheme or to the settlement of the Canal Waters dispute between India and Pakistan, or to the various other projects mentioned in a memorandum which is being provided to you separately in response to your request for suggestions of things that might be done with $100 million in carrying out our general foreign policy and "implementing" Article 2).

11. It would appear to me that an understanding on these lines would enable us to play a constructive - and even decisive - role in the discussions relating to the proposal for a United Nations fund.

12. Needless to say there are many features of the proposed fund which will require careful consideration before we get into detailed negotiations with other countries. For example, do we want the Russians in or don't we? Should the fund be related in some way to the Technical Assistance Board or the International Bank? Should contributions be on a voluntary basis or should they be assessed by agreement among the participants? In addition to disbursing its own monies should the fund also perform certain functions in connection with bilateral aid programmes (at least maintaining records of assistance supplied by one country directly to another)? These various aspects will of course be examined intensively by officials over the next few weeks. It would appear, however, that substantial progress on these details and on the project as a whole is dependent on agreement in principle being reached at an early stage by the Ministers concerned.

J. L[éger]

[PIÈCE JOINTE/ENCLOSURE]

Note

Memorandum

CREATION OF A SPECIAL CAPITAL AID FUND UNDER THE AUSPICES
OF THE UNITED NATIONS

The question of the creation of a United Nations capital aid fund has been under consideration in the United Nations and ECOSOC for over five years. Despite the atmosphere of confusion or suspicion that has surrounded the debates on this subject in the past, the creation of a United Nations capital aid fund must now be viewed as one of the major questions facing Canada and other western countries both in relation to our activities within the United Nations and in relation to our policies for aiding the under-developed countries.

2. In assessing the importance that this issue has now assumed, the following factors should be considered:

(a) the recent entry of sixteen new members (many of them under-developed countries) into the United Nations;

(b) the growing impatience of under-developed countries (including many of the new members) in the United Nations at the delaying tactics which have been employed by the western countries in these debates. This impatience is likely to be exploited widely by the USSR bloc in the forthcoming sessions of ECOSOC and the United Nations as evidence of the West's opposition to the creation of a multilateral capital aid fund;

(c) the emergence within the next few years as independent states of a number of areas traditionally associated with the western world and in some cases with the Commonwealth in particular (Nigeria, the Gold Coast, Malaya, etc.); and the increasing requirements of these areas for external assistance which must be largely provided during the initial years of their development in the form of grants;

(d) the evidence that for many of the under-developed countries, grants are required to supplement and render more effective the programmes of the International Bank and the International Finance Corporation (this view is supported by the President of the International Bank);

(e) the limited resources which now exist (under bilateral programmes) for aiding many of the uncommitted countries in the Colombo Plan area (Burma, Indonesia) and in other critical parts of the world (the Middle East);

(f) the evidence that the USSR are now prepared to provide its own special form of economic assistance to many of the under-developed countries and to represent both inside the United Nations and in the countries concerned that western programmes are purely "self interested" and do not recognize many of the special needs of the under-developed countries, particularly those which are so far uncommitted in their alignment in the cold war;

(g) the interest which is being displayed in NATO (partially in relation to Article 2) and in OEEC, concerning the importance of economic aid to under-developed countries as a response to the Soviet economic offensive and more positively as evidence of the interest of western associations in the welfare of the under-developed countries;

(h) the desirability of mobilizing the resources of western European countries (Germany, Belgium, The Netherlands, etc.) who are relatively well disposed and capable of providing economic aid to under-developed countries;

(i) the progress of a number of under-developed countries which in the past have been virtually incapable of absorbing more than a very limited amount of foreign capital to a point where capital grants to carefully selected projects can have highly beneficial effects on their economies; because of the increasing tempo of technical assistance which is being provided to under-developed countries both under the Colombo Plan and United Nations programmes, it is reasonable to assume that the ability of under-developed countries to absorb capital aid will increase rapidly over the next few years.

3. In the past, countries that might be regarded as potential contributors (including Canada) have generally been reluctant to enter into discussions within the United Nations which might involve any commitment about the immediate establishment of SUNFED. As a result, the potential contributing countries have not so far taken an active part in the shaping of any proposals for a capital aid fund. Of consequence, some of the claims put forward by the under-developed countries and their supporters (e.g. the Scheyven Report)⁵⁹ have often been extravagant or ill considered. The special committee which will meet in New York on May 7th to consider replies to the SUNFED questionnaire will presumably give many of the contributing countries an opportunity to participate in discussing the structure of a capital aid fund in a practical and constructive manner.

4. While the SUNFED which has been developed by Mr. Scheyven is not considered by many of the contributing countries to represent an efficient and sound basis for considering the establishment of a special capital aid fund, the Scheyven Report does point out most of the considerations which should be borne in mind in determining how an international capital aid fund should be set up. For example, the Report discusses the relative merits of grants versus loans, loans repayable in local currency, the use of commodities to create counterpart funds, and the use of grant aid in certain circumstances to cover local as well as external costs of projects. However, many of the conclusions which are reached in the Scheyven Report are not those which will command much support in the potential contributing countries:

5. In the simplest terms three possible types of capital aid fund might be set up within the United Nations:

(a) a separate special fund (this does not have to be necessarily the SUNFED recommended by Mr. Scheyven) might be created. It is, of course, a fund of this nature which the under-developed countries, themselves, would support and which the Netherlands, Belgium and others have been pressing for over the past few years. The Scheyven Report mentions $250 million a year as the amount which might be desirable for such an agency. The report suggests, however, that a lesser amount of between $150 and $200 million (which is about the rate of the International Bank's annual lending) would enable a number of essential projects to be undertaken in the under-developed countries;

(b) the association of a capital aid fund with the International Bank along the lines of the relationship between the Bank and the International Finance Corporation;

(c) the association of a more modest capital aid fund with the United Nations Technical Assistance Board which would enable that body to make capital expenditures in support of their technical assistance programmes. The amounts involved in this approach would be presumably much lower than the figure recommended in the Scheyven Report.